Building your Financial
Success
With Alain Aube
Tax Planning
Canadian taxes
are higher than U.S. taxes, right? Not necessarily …
Canadians believe we are among the most highly taxed people in the world
- and that we're especially burdened when compared to our tax-lite
neighbour to the south. But before you hand in your resignation, pack up
the van and head for what appears to be a less taxing life in, say,
Seattle or Phoenix, consider this: While it's true that U.S. taxes are
often less than ours, they can also be higher than in Canada, depending
on where a person lives. And even in U.S. jurisdictions with a lower
over-all tax bite, the difference may be a lot less than you think,
especially when other 'lifestyle' costs are factored in.
Here's an example: Jerry Smathers* is a middle-income earner who lives
in Windsor, Ontario and works just across the border in Detroit,
Michigan. Jerry's Canadian federal and provincial tax liability is
$14,200 (Canadian dollars). This tax is completely eliminated by a
foreign tax credit since, when you combine federal, state and FICA (The
Federal Insurance Contributions Act that requires employers and
employees to pay a social security and hospital insurance tax according
rates set by the federal government to support the country's Social
Security Program.), Jerry's total U.S. tax bill is a Canadian dollar
equivalent of $14,900. Furthermore, contributing to a Canadian RRSP will
not help to reduce the tax bill since Canadian RRSP contributions cannot
reduce U.S. taxes.
A recent report for Alberta Economic Development (AED) found similar
variances. The report compared personal taxes and the cost of living for
high-tech employees at five different salary levels in seven Canadian
and seven U.S. cities. And while the 2002 study did confirm that
personal taxation costs in Canadian jurisdictions are generally higher
than in the U.S., it also found that this difference can be
significantly offset by lower costs for the purchases of general goods
and services in Canada and for housing in some Canadian cities.
The AED report establishes that when the annual cost of living - for
such things as accommodation, transportation and other goods and
services purchased over the course of a year - is added to the costs of
various levels of taxation - federal income tax, state or provincial
income tax, statutory plans (such as FICA in the U.S. and CPP, EI in
Canada), sales tax and property tax - some of the profiled Canadian
cities fare better than certain U.S. cities, especially when salary
levels are factored in. For example, for high-tech employees earning
from $40,000 to $80,000 a year, the total cost of living (in Canadian
dollars) is higher in Boston, Minneapolis, Seattle and San Jose than in
all seven of the Canadian cities profiled in the report - Calgary,
Edmonton, Lethbridge, Montreal, Ottawa, Toronto and Vancouver.
As income increases, most U.S. cities become more competitive in terms
of the total cost of living. But, even at the $150,000 income level, a
high-tech employee in Lethbridge, Edmonton or Calgary can expect a lower
cost of living than in all seven of the profiled U.S. cities -- Boise,
Boston, Colorado Springs, Minneapolis, Phoenix, San Jose and Seattle.
And there's even more good Canuck news in the AED report: All Canadian
cities improved their overall ranking in comparison to the same study
conducted in 2001.
The report also looked at one other typical family expense: the cost of
a university education. In its survey of 19 Canadian and 26 U.S.
universities in the selected cities, only one Canadian university had
(slightly) higher non-state-resident tuition fees than the lowest-cost
U.S. institution.
In the real estate business, location is everything. The same would
appear to be true of your personal tax burden and overall living costs,
regardless of whether your home is north or south of the 49th parallel.
You can't always choose exactly where you'd like to live - your job,
family responsibilities and other factors may dictate the location of
your home - but, wherever you decide to put down roots, you always want
to get the best possible tax breaks - and a financial advisor can help
you do just that.
*This is a fictitious name and does not represent any person living or
dead.
